a forum for news, ideas and commentary on the art and science of long-term investing

Monthly Archives: May 2013

One of the most interesting market stories in the last week is the big drop in the Japanese stock market. Japan is the third-largest economy in the world, ranked by GDP. The values of the Japanese stock market, as measured by the Nikkei 225 index, dropped by 7.3% on May 23rd, and then suffered another fairly dramatic one-day decline of 3.2% on May 27th.

Over the last five sessions, the iShares MSCI Index ETF, EWJ, has dropped by almost 10% (see chart below). Continue reading →

As the market rally persists, many investors will no doubt be kicking themselves and wishing that they had bought in earlier. Some will convince themselves that they better get on board or risk missing out on this bull market. There are many good reasons to invest money, but choosing to get in because of the potential gains that you could have made is not one of them. In the same way that people capitulate and sell out near market bottoms, there is also a big behavioral driver that seems to make people capitulate and join the herd towards the end of big bull markets. I am not saying that we are poised for decline (I am not a good market timer), but simply noting that buy or sell decisions made on the basis of what you wished you had done last month or last year is often truly dangerous. Continue reading →

The yield of an asset is a key component of predicting future returns. This is true for the yield on Treasury bonds as well as the dividend yield for stock indexes. The yield on aggregate bond indexes is considered a good proxy for future expected returns. The dividend yield of broad stock indexes has been shown to provide significant value in predicting future stock index returns. In both cases, low yields tend to predict high future returns, and vice versa. These arguments that yields predict returns are not without critics, especially for equities. Continue reading →

The S&P500 has recently been hitting new all-time highs, which would seem to suggest that the economy is recovering and that the U.S. economy is back on track. The story does not look quite so rosy when you account for inflation, as Mark Hulbert has recently noted. The current level of the S&P500 is, in fact, still about 24% below its high in 2000 once inflation is considered. Economists and finance people would say that, measured in real terms, the S&P500 is 24% lower than it was at its 2000 peak. What this means is that the proceeds from the sale of a share of an S&P500 index fund purchases considerably less in real goods today than it did thirteen years ago. Continue reading →

In the most general terms, growth stocks are those with growing positive attributes – like price, sales, earnings, profits, and return on equity. Value stocks, on the other hand, are stocks that are underpriced when compared to some measure of their relative value – like price to earnings, price to book, and dividend yield. Thus growth stocks trade at higher prices relative to various fundamental measures of their value because (at least in theory) the market is pricing in the potential for future earnings growth. Over relatively long periods of time, each of these investing classes can and do outperform the other. For example, growth investing dominated the 1990s while value investing has outperformed since. But value wins over the long haul. Continue reading →

What Type of Investor Are You?

Understanding your investing profile to achieve your financial goals starts with a few simple questions. The Investor Questionnaire, by Folio Investing, will help you understand your investment time horizon, investor profile and level of risk.